Tax & ATO News Australia

Nice noises from Joe Hockey

In an address to the Canberra National Press Club on Wednesday 22 May 2013, the shadow Treasurer had some very interesting and promising things to say about the possible future of the ATO.

 

• He wishes to foster a more co-operative relationship between the ATO and taxpayers
• The relationship should be based on mutual respect, not adversarial
• Taxpayers are not the enemy
• He recognises the ATO’s powers are too one sided
• ATO officers often seem to lack objectivity
 
Joe Hockey has promised a Coalition government will establish a Parliamentary Committee charged with the oversight of ATO administration.
 
If necessary, the Coalition may break up the ATO to separate its administration and prosecutorial functions.
 
This recognition of the deep flaws in the current audit and dispute system is a welcome and excellent development in the Federal election – coming as it does in a major speech following the budget.
 
Hopefully the delivery will match the rhetoric and we can look forward to a less aggressive and destructive approach from the ATO in coming years.
 
More about Joe Hockey's speech - click here.

Posted in: Tax & ATO News Australia at 22 May 13

ATO not allowed to amend an assessment outside the two year period

For most individuals, the ATO has two years to amend an assessment after the individual has received the notice of assessment. Recently in Elliott, the AAT held that the ATO was not entitled to amend the taxpayer’s assessment outside of the two year period.

 

The taxpayer was employed as a pilot by a wholly owned subsidiary of Cathay Pacific. The taxpayer was in receipt of foreign earnings which he treated in his 2006 and 2007 returns as exempt. However, in Overseas Aircrew Basing Ltd, the Federal Court held that such income was not exempt and on this basis, the ATO tried to amend the taxpayer’s assessment outside the two year period.
 
The ATO argued that it was entitled to amend outside the two year period because the two year rule is qualified by the Income Tax Regulations 1936 (Cth). In particular, the ATO tried to rely on Regulation 20 Item 5 of the regulations which provides that the taxpayer has not identified income from one or more foreign transactions for the purposes of, or in the course of, the assessment. The ATO contended that the taxpayer had not 'identified' the relevant income because he had not 'identified' the income under the correct label in his returns.
 
The Tribunal found that, in the context of Regulation 20, the applicant only needed to identify in his returns an amount of income from a foreign transaction, as he had, and that he did not have to go the further step and make a correct assessment about whether that income was exempt or assessable.
 
I am pleased by the outcome of this decision as it prevents the ATO from pushing the boundaries on these time limits. It is also interesting that the ATO supports this decision. On 5 October 2012, the ATO released a Decision Impact Statement stating that, “[it] accepts that the Tribunal's view of the interpretation of Item 5 of Regulation 20, and its application of that view to the facts in this case, were properly open to it”.

Posted in: Tax & ATO News Australia at 08 May 13

NSW duty abolition is .... Gonski

The NSW government has yet again delayed the long awaited abolition of duty in NSW on mortgage duties on business transactions, duties on unquoted marketable securities, and duties on the transfer of non-land business assets.

 

NSW Premier Barry O’Farrell yesterday announced the further delay of the abolition of these duties to partly fund the contribution by the NSW Government to the Gonski reforms.
 
Each state government was required to abolish certain state taxes including duties as part of the trade-off for the introduction of the GST. The state governments committed to abolishing most duties as part of the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations. In recent budget years the NSW government has consistently delayed the abolition of these key duties affecting businesses to fund budget holes or commitments.
 
It is safer to take the view that the abolitions of these duties is gonski and then we can all be pleasantly surprised when they are eventually abolished in the future.
 

Posted in: Tax & ATO News Australia at 24 April 13

ATO's power to amend assessments is subject to certain time limits BUT they can (and do) extend

The Australian tax system operates as a self-assessment system. This means that when you lodge your tax return, the ATO accepts the information in the return at face-value and issues you with an assessment notice based on that information. However, this does not mean that the assessment is final as the ATO can conduct an audit and amend your assessment. Fortunately, the ATO’s power to amend assessments is subject to certain time limits.

 

For most individuals, the ATO has two years to amend an assessment after the taxpayer has received the notice of assessment. The two year period also applies to companies, trusts and partnerships which carry on a small business entity. A small business entity is a business with an aggregate turnover of less than $2million in a financial year.
 
However, if an individual, company, trust or partnership carries on a business that is not a small business entity, then the period extends to four years.
 
It is important to note that the ATO has the power to amend an assessment at any time if the Commissioner of Taxation is of the opinion that there has been fraud or evasion. The problem with this rule is that it is subjective as it is based on the Commissioner of Taxation’s opinion.
 
One of my clients is faced with a situation where the ATO has amended his assessment nine years after the notice of assessment was issued based on the fact that the Commissioner of Taxation is of the opinion that there was evasion. The onus of proof rests with my client. Therefore, my client has to prove that there was no evasion.
 
Generally, it is not necessary to keep records indefinitely, but as the ATO has the power to allege tax evasion and assess you retrospectively, you should strongly consider keeping records, at least in electronic form, for longer periods than are legally required.
 

Posted in: Tax & ATO News Australia at 15 April 13

Section 264 notices

I have blogged previously about the ATO’s powers to force taxpayers to hand over documents and give evidence*. Recently I have applied the very narrow limitations imposed by the ANZ case in a number of s264 notices.

 

The powers of the ATO to issue these notices are very wide, but the ATO must get the wording of the notices right.  If the notice is vague, or uncertain, or in the words of the Full Federal Court if the notice “leaves too much of its meaning and application to be worked out by [the recipient]” then the notice will be invalid.
 
Objecting to a s264 notice on these grounds is not a final remedy.  The ATO can always re-issue a notice, even assuming that they agree with your argument that the notice is too unclear.  Furthermore, you must have very strong grounds because if you are wrong the ATO has the option to prosecute you for failing to comply.  Multiple offences can lead to imprisonment.
 
The broader issue is one of a recurring nature. The government has handed the ATO with an extremely large stick for investigating taxpayers, and for that matter, their advisers and service providers such as banks. The ATO can, and often does, use s264 notices for fishing expeditions. They are specifically allowed to do so. Because of their virtually unfettered power, in some cases the ATO officers are sloppy and lazy when drafting s264 notices.  The ANZ case makes it clear that because of the seriousness of the consequences of failing to comply with a s264 notice (ie jail time) the ATO must make the notices clear.  If the recipient has to guess at the ATO’s meaning, this is not good enough.
 
This is particularly so where the ATO is asking information of an accountant or lawyer with respect to their clients. If the adviser has to guess at the meaning of the s264, and guesses wrong (i.e. gives more information than the notice intended to the client’s detriment), it is likely the client would have a claim against the adviser for breach of express or implied duties of confidentiality.
 
If you receive a s264 notice and you are concerned as to its meaning and your duty to respond to it, please feel free to get in contact with me to discuss it.

* under section 264 of the Income Tax Assessment 1936 and section 353-10 of the Taxation Administration Act 1953
 

Posted in: Tax & ATO News Australia at 22 March 13

ATO affirms Bornstein decision

In an earlier blog I discussed the ATO’s reluctance to exercise its discretion to disregard excess superannuation contributions. You may recall that the Administrative Appeals Tribunal has found in favour of the ATO in all cases except two: Bornstein and Longcake. The ATO has now released a Decision Impact Statement in support of the AAT’s decision in Bornstein.

 

Bornstein concerned a taxpayer who was a sole director, shareholder and employee of a small company. At the end of each financial year Mr Bornstein, as ‘employer’, would make a superannuation contribution into his own superannuation fund. While overseas between 21 June and 8 July 2007, Mr Bornstein emailed his accountant to ask whether a superannuation contribution needed to be made prior to 30 June. Mr Bornstein received no response from his accountant, and decided to check the ATO website to see when the contribution could be made.
 
Mr Bornstein found on the website that an employer has up until 28 July to make a compulsory contribution for the previous quarter in accordance with the Superannuation Guarantee Administration Act 1992 (Cth). However, the site did not identify the consequences of such late payment on the employee under the excess contributions regime. Mr Bornstein was not aware of this parallel regime.
 
In reliance on the belief that a payment on 10 July 2007 would relate to the 2007 income year, Mr Bornstein proceeded to make a contribution. In June 2008 Mr Bornstein made a further contribution to his superannuation fund after confirming with his accountant that this was correct.  The ATO later assessed him for excess contributions tax because of the June 2008 payment.
 
Based on the circumstances, Mr Bornstein applied to the Commissioner to exercise his discretion to disregard the resulting excess contributions. However, the Commissioner did not exercise his discretion to do so.
 
On appeal of the decision, the Tribunal held that the Commissioner’s decision should be set aside and that discretion should be exercised in favour of Mr Bornstein. Senior Member McCabe held that special circumstances existed because there was a “‘perfect storm’ of events, miscommunications and misunderstandings”.
 
The Decision Impact Statement released by the ATO affirms this decision, and states that the decision is consistent with its stated view in PS LA 2008/1. In particular, paragraph 37 of PS LA 2008/1 provides that “each individual case will present a unique set of circumstances that need to be considered and weighed up in forming an opinion. It may not be helpful to focus too closely on each particular circumstance and ask whether it is special. Of itself, one particular matter is unlikely to be special for there would be many other individuals in a similar situation. The question is whether, when the relevant circumstances of the individual and the making of the relevant contribution are looked at in their entirety, they may be fairly described as unusual, uncommon or exceptional so as to warrant the exercise of the discretion”
 
It is not surprising that the ATO has affirmed this decision, as the decision establishes a very high threshold for exercising the discretion. 
 

Posted in: Tax & ATO News Australia at 20 March 13

New Commissioner of Taxation flags changes to the appeal process

Chris Jordan has only been in the top job at the ATO since 1 January 2013 and he has already identified that the current tax appeal process is not independent and needs to be fixed.
 
Tax appeals are currently heard in first instance by ATO officers and this process must be exhausted before an independent body (such as the Administrative Appeals Tribunal or the Federal Court) can hear a tax appeal.  This can take months (even years) and cost the taxpayer enormous amounts of money. There has been significant criticism of this process as it is not independent. There are examples of ATO officers who hear the tax appeal simply rubber stamping the work of the auditor. Worse, there have been allegations that the ATO has benchmarks for this process that require ATO officers to knock back 80% of appeals, rather than judge them on their merits.
 
The current system is clearly broken and needs to be fixed. The new Commissioner has taken a step in the right direction by moving towards an independent division, although it appears that this division will still be within the ATO.  It will be interesting to see whether this new appeals division really will be independent.
 
Small business taxpayers, many of whom I have acted for against the ATO, will rightly point out that this is all very interesting from an administrative law perspective, but how will things change for those taxpayers who have been subjected to the delays, cost and institutional biases of the current system?  Now that the new Commissioner has acknowledged that the current tax appeal process is broken, will there be meaningful compensation paid to those taxpayers whose lives have been financially devastated by it?
 
I am calling on the new Commissioner to relook at all such taxpayers and make it a key priority of his tenure. The only way that confidence in Australia’s tax system can be restored is by ensuring accountability for ATO officers and that means that the ATO must pay adequate compensation to those taxpayers who have unfairly suffered at the hands of the ATO.
 

Posted in: Tax & ATO News Australia at 13 March 13

ATO has a broad power to access documents and obtain information

The ATO has a broad power under s264 (1)(a) of the Income Tax Assessment Act 1936(Cth) to request any person to furnish the ATO with information that the ATO may require.

 

In December 2010, the ATO issued ANZ Bank with two s264 notices requesting that ANZ provide details of more than 1,300 Vanuatu accounts held by Australia from its digital database called “Global Digital Warehouse”.
 
On 9 March 2012, the Federal Court of Australia handed down a decision in favour of the ATO that the two notices were valid. The Federal Court rejected ANZ’s submission that production of the information to the ATO would be oppressive, breach confidentiality and violate secrecy provisions enacted in Vanuatu.
 
ANZ then instituted an appeal in the Full Federal Court of Australia. On 12 September 2012, the Full Federal Court of Australia dismissed ANZ’s appeal and held that s264 authorises the ATO to issue a notice to ANZ requiring it to furnish information that is stored in Australia. The Full Court agreed with the Federal Court that the production of the information would not be oppressive, would not breach confidentiality nor breach the non-statutory obligations of confidence under the law of Vanatu.
 
While the appeal was dismissed, ANZ had a small victory in that the Full Court held that one of the notices was invalid due to uncertainty. However, due to the broad powers given to the ATO under s264, it is anticipated that the ATO will simply reissue the notice to obtain the information anyway.
 
This case demonstrates that s264 confers very broad investigative powers on the ATO. As such, this could implicate many other Australian businesses.
 
A notice under s264 should not be treated lightly. If you receive a notice, you are legally obliged to respond to the notice otherwise you may face serious consequences.  I would recommend anyone who receives such a notice to seek professional taxation advice immediately.
 

Posted in: Tax & ATO News Australia at 04 March 13

SPAA SMSF National Conference 2013

Day one of the conference is now done and I am well and truly into the swing of day two.  You can see the some of the highlights of day one here including  a round up of the speakers for the day.

Posted in: Tax & ATO News Australia at 14 February 13

ATO's tough stance on excess contributions

Closely monitoring your superannuation contributions is critical because the ATO makes no exceptions if you exceed the superannuation contributions caps. A contributions cap sets a limit on the amount of contributions you can make in any financial year. In the 2012-2013 financial year, the limit is $25,000 for concessional (before tax) contributions and $150,000 for non-concessional (after tax) contributions. If you exceed these caps, your excess contributions are likely to be subject to the penalty tax.

 

The ATO has the discretion to disregard excess contributions if special circumstances exist, yet this discretion is not exercised lightly. A number of taxpayers have therefore challenged the ATO’s decision in the Administrative Appeals Tribunal (AAT). Unfortunately, the Tribunal has often sided with the ATO and these taxpayers have been forced to pay the penalty tax. In fact the Tribunal has only found in favour of the taxpayer in two cases. In both cases, the Tribunal held that special circumstances existed because there was a “perfect storm” of events, miscommunications and misunderstandings. With the spike in excess contributions tax (ECT) assessments again expected for the 2012-13 financial year, monitoring your superannuation contributions is critical.
 

Posted in: Tax & ATO News Australia at 21 January 13

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Tax & ATO News Australia

Author: David Hughes

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